The Cyprus surprise

by on March 15, 2013 at 11:41 pm in Current Affairs, Law, Uncategorized | Permalink

Announced Friday night of course:

Final details being inked on #Cyprus bailout as we speak. Most significant measure: 9.9% levy on bank deposits over €100,000, says source.

That is from Peter Siegel.  (Addendum: and here is more information.)  I believe that is not the full deal (do depositors get some kind of equity claim?) and there is more information to come.  Elsewhere, all four games were drawn in the Candidates Match for the right to play against Anand for the world chess championship.  It will be interesting to see who makes the next move.

p.s. I don’t like to give investment advice (other than “diversify” and “buy and hold”), but if you have any deposits in Cyprus banks, I would recommend asking yourself whether you are sure that this is the final haircut or step one in a series.

derek March 16, 2013 at 12:01 am

Heh. That should attract depositors.

The fact that it is proposed tells me that it isn’t about confidence or any such fuzzy stuff, but solvency. Surely the European overlords know that this will make every European deposit in European banks, that are almost all of them in tenuous shape, prone to lose money if push comes to shove. But they did it anyways. Maybe this is why the US Treasuries have moved over the last short while.

Millian March 16, 2013 at 5:00 am

“that are almost all of them in tenuous shape”

This is a logical leap on which the rest of the argument hinges. Of course, they are not.

derek March 16, 2013 at 11:47 am

You don’t get it, do you. The financial stability of Europe rests on the optical backstops that are behind all the banks in the south and the banks in the north who lent them money. Spain’s yields were getting out of hand a while ago and the ECB said they would buy them, bringing stability without the ECB having to write a check. Optical. An explicit or implicit guarantee that when all hell breaks loose there will be someone there to bail everything out.

Here we have a piddling little bank in Cyprus The depositors are a rather unpleasant sort. The German and other European banks and governments are going to make the depositors pay some of the costs, make them take a hair cut. I have no illusions of the collective intelligence of the financial world, but they aren’t so stupid to realize that 1) there is no real backstop at all when it comes time to write a check, 2) when Spain-Italy-Portugal-Greece-Ireland—France ‘s banks hit a bit of a wall, there is no backstop, get your money out. This is already happening.

But more importantly, the banks who are owed the money cannot swallow the losses, and the governments of their countries can’t come up with the money to allow them to do it. So if I have money in German or other northern European banks who are the creditors, get your money out of there as well. Depositor money is now seen as a bailout fund.

Why would Germany and others dismantle the optical backstop? I suggest it is because it is only optical and when it comes time to write a check there isn’t anything there.

prior_approval March 16, 2013 at 12:32 am

Cyprus is a major, major center for very dirty money handling – there really aren’t too many substitutes.

And if some clever Russian banking ‘analyst’ can figure out a way to make their deposits magically laundered at only 9.9%, Cyprus could conceivably see an increase in deposits, at least as long as it took the wire transfers to reach another banking certer.

But in reality? Most people in the EU would be thrilled if the special banking role Cyprus plays was more or less eliminated – the more money that leaves Cyprus, the better, since in many cases, what will be left is deposits of money which can’t be easily moved – money involving massive corruption, bribery, smuggling, arms dealing, drug dealing, tax evasion.

DocMerlin March 16, 2013 at 12:44 am

As if anyone is going to pay the tax. You can instantly electronically break any transaction into smaller chunks for free.
It was the stupidest bit of demagoguery ever.

Dylan March 16, 2013 at 11:59 am

The tax is pretty obviously on existing accounts and “one time” so future transactions of any size are irrelevant. And there’s a tax of 6.75% on accounts smaller than 100k.

prior_approval March 16, 2013 at 12:22 pm

‘As if anyone is going to pay the tax. ‘

The joke is on you – I certainly hope you haven’t advised any Russian ‘businessmen’ about this issue.

The tax has already been levied – if your account had a 100€ balance, you can now take out 93.1€, and no more.

It is a simple thing to program, actually.

DocMerlin March 16, 2013 at 12:43 am

“Most significant measure: 9.9% levy on bank deposits over €100,000, says source.”

So everyone instantly breaks their deposits into 100,000 euro chunks.
Most ineffectual tax ever.

Alexei Sadeski March 16, 2013 at 2:07 am

I wasn’t aware time travel was so simple.

ibaien March 16, 2013 at 3:59 am

Do you really believe you have a non-zero number of readers with money tied up in Cypriot banks? I thought you gave your audience more credit than that. Or, you believe your readership includes some number of third-tier Russian oligarchs. Hmm.

BC March 16, 2013 at 5:39 am

“I would recommend asking yourself whether you are sure that this is the final haircut or step one in a series.”
They promise that this is a “once and for all levy”, so that answers that question. That promise is quite literally like money in the (Cypriot) bank.

Favorite phrases from the NYT article that TC links to: “[The bailout, including the deposit tax] should ensure no further flight of depositors from Cypriot banks.”
I guess their conception of deposit insurance is different from ours.

Second favorite phrase: “The Cypriot authorities wanted a plan that ensures that the island remains attractive to investors.”
I guess we can’t always get what we want.

Anon. March 16, 2013 at 5:48 am

Here’s something I don’t understand: why have Cypriot banks not faced a run yet? There seems to be no downside to taking your money out of their banks…perhaps the money launderers have to keep the money in the country for fear of being discovered?

Luis Pedro Coelho March 16, 2013 at 6:31 am

“p.s. I don’t like to give investment advice (other than “diversify” and “buy and hold”), but if you have any deposits in Cyprus banks, I would recommend asking yourself whether you are sure that this is the final haircut or step one in a series.”

Which is why capital controls have been imposed.

prerequisite April 10, 2013 at 12:22 am

You really make it seem so easy with your presentation but I find this topic to be really something that I think I would never understand. It seems too complicated and extremely broad for me. I’m looking forward for your next post, I will try to get the hang of it!

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